Editor’s Note:

Rhode Island, history teaches us, was among the earliest colonies to establish a formal system for insolvencies and bankruptcies back in the 1700s. Recently, members of the National Conference of Insurance Legislators met in this state’s beautiful seaside community of Newport to consider, among other topics, insurance company insolvencies and how best to prevent them.

On the agenda was whether the federal Sarbanes-Oxley law governing public companies should be applied in part to non-public insurance companies to improve solvency monitoring. Also up for discussion was the idea of permitting insurers to adopt a federal charter, thereby bypassing state regulation.

But the hottest topic of conversation at NCOIL was the Terrorism Risk Insurance Act, which expires at year’s end, and the Treasury report that recommends against renewing it in its current form. One after another, legislators, lobbyists, researchers and regulators cited the London bombing as a tragic reminder of the need to continue the U.S. program. They expressed frustration that the Treasury and a few “principled” economic conservatives were blocking TRIA.

Publicly and privately, experts at the NCOIL gathering along with others around the country, cited a disturbing disconnect between the Treasury report’s findings and its political conclusions. Treasury acknowledges the realities that modeling for terrorist attacks is not where it needs to be to set actuarially sound prices; that reinsurance capacity is inadequate to even meet current deductibles let alone demands under a TRIA-less system; that alternative private capitalization and risk-sharing mechanisms have not yet materialized, and that too many businesses operate unprotected against terrorism risk.

Yet, the report dismisses these as inconsequential. Like a grade C high school term paper, it substitutes free market fantasies where hard conclusions are called for. It reads:

While TRIA is in effect, however, it crowds out development of some reinsurance markets, and delays the development of private capacity to provide terrorism risk insurance. Over time, we expect that the private market will develop additional terrorism insurance capacity. We anticipate that the initial response of premiums in the market will spur the buildup of surplus as insurers tap into capital markets and the development of additional private reinsurance and other risk shifting mechanisms.

The authors apparently have inside information about an underground source of capital that will miraculously sprout once the roots of TRIA are destroyed. But they never share their secret. The Treasury report is so bad it might be good for TRIA proponents if it were not for the fact that it represents the policy of the Administration, which signaled a willingness to “compromise” with a program that kicks in after $500 million and imposes high deductibles and other restrictions. The conditions Treasury wants would gut the program while any talk of a new solution and long term fixes simply delays action on TRIA.

If TRIA falls, policymakers might want to go back to their history books on Rhode Island because the debate over insolvencies will take on renewed urgency.